What are the main technical indicators for novice traders?

Are you starting out in the trading game? Finding the best technical indicators to track the stock is important. It affects how you will interpret trends, both on positions and overall averages, as well as the type of opportunities that emerge in your overnight search.

Choose wisely and you have built a solid foundation for success in speculation. Choose badly and the predators will line up, ready to pull your pockets at every turn.

Trading strategies for beginners

Most novices follow the herd as they build their first trading screens, grabbing a stack of canned indicators and tucking as many as they can under the price bars of their favorite stocks. This “more is more” approach short-circuits signal production because it looks at the market from too many angles at once. It's ironic because indicators work best when they simplify the analysis, eliminate noise, and provide actionable results based on trends, momentum, and timing.

Instead, take a different approach by breaking down the types of information you want to track during the day, week, or month of the market. In truth, nearly all technical indicators fall into five research categories.

Each category can be further divided into leads or late. Leading indicators attempt to predict where the price is headed while lagging indicators offer a historical report of the underlying conditions that caused the current price to be where it is.

Trend (lagging) indicators analyze whether a market is moving up, down, or sideways over time.
Average (lagging) return indicators measure how far a price swing will extend before a reverse impulse triggers a retracement.
Relative strength indicators (leading) measure swings in buying and selling pressure.
Momentum (leading) indicators measure how quickly prices change over time.
Volume indicators (early or late) record trades and quantify whether the bulls or bears are in control.

Trend indicators

50-day EMA and 200-day EMA

We will start with two indicators built into the same panel as daily, weekly, or intraday price bars. Moving averages look back at price action over specific time periods, breaking down the total to create a running average that is updated with each new bar.

The 50 and 200-day exponential moving averages (EMA) are more responsive versions of their better-known cousins, the simple moving averages (SMA). Simply put, the 50-day EMA is used to measure the mid-term price of a stock, while the 200-day EMA measures the long-term average price.

The 50-day and 200-day EMAs of the US Oil Fund ( instrument reached a 9-month high. The 50-day EMA fell to the downside in August, followed by the 200-day EMA a month later.

The short-term then crossed the longer-term average (indicated by the red circle), indicating a bearish trend change that preceded a historical breakdown.

Average reversal indicators

Bollinger bands

The buy and sell impulses of USO extend to seemingly hidden levels that force you to set in motion against waves or retracements. The Bollinger Bands (20, 2) try to identify these turning points by measuring how far the price can travel from a central trend pivot - the 20-day SMA in this case - before triggering an impulse back to the mean.

The bands also contract and expand in reaction to fluctuations in volatility, showing watchful traders when this hidden force is no longer an obstacle to rapid price movement.

Relative strength indicators

Stochastic

The movement of the market evolves through buying and selling cycles which can be identified through stochastic (14,7,3) and other relative strength indicators. These cycles often peak at overbought or oversold levels and then move in the opposite direction, with the two indicator lines crossing.

Alternating cycles do not automatically translate into higher or lower safety prices as might be expected. Rather, bullish or bearish turns indicate periods when buyers or sellers have control of the ticker tape. It still takes volume, momentum, and other market forces to generate price changes.

SPDR S&P Trust (SPY) fluctuates through a series of buy and sell cycles over a 5 month period. Look for signs where:

A crossover has occurred at or closes to an overbought or oversold level
The indicator lines then move towards the center of the panel.

This two-level confirmation is needed because Stochastic can fluctuate near extreme levels for long periods in strongly trending markets. And, while 14,7,3 is a perfect setting for inexperienced traders, consider experimenting to find the setting that best fits the instrument you are analyzing. For example, experienced traders switch to inputs 5,3,3 faster.

Momentum indicators

MACD

The MACD ( Moving Average Convergence Divergence ) indicator, set to 12, 26, 9, offers novice traders a powerful tool to examine rapidly changing prices. This classic momentum tool measures how quickly a particular market is moving as it tries to spot natural turning points.

The buy or sell signals stop when the histogram reaches a peak and reverses course to cross the zero line. The height or depth of the histogram, as well as the rate of change, all work together to generate a variety of useful market data.

SPY shows four notable MACD signals over a 5 month period. The first signal signals waning momentum, while the second captures a directional push that develops immediately after the signal goes out.

The third signal looks like a false reading but accurately predicts the end of the February-March buying impulse. The fourth triggers a hacksaw which is evident when the histogram fails to penetrate the zero line.

Volume indicators

Balancing Volume (OBV)

Keep the volume histograms below the price bars to look at current interest levels for a particular stock or market. The skew of participation over time reveals new trends, often before pricing models complete breaks or breaks. You can also enter an average of 50 days of volume on the indicator to see the comparison between the current session and historical activity.

Now add the volume on balance (OBV), an accumulation distribution indicator, to complete the snapshot of the transaction flow. The indicator sums up the buying and selling activity, determining whether the bulls or bears are winning the battle for higher or lower prices. You can plot trend lines on OBV, as well as track the sequence of highs and lows. It works very well as a convergence-divergence tool. For example, between January and April, Bank of America (BAC) demonstrated this when prices hit a higher high while OBV hit a lower high, signaling a bearish divergence preceding a sharp decline.

The bottom line

Choosing the right technical indicators is daunting, but it can be managed if inexperienced traders focus the effects on five categories of market research: trend, average reversal, relative strength, momentum, and volume.

After adding effective indicators for each category, they can begin the long but satisfying process of changing inputs to match their trading styles and risk tolerance.